European stocks were little changed in the first week of 2014 after a two-year rally that sent the Stoxx Europe 600 Index to its highest level since May 2008.
Fiat SpA jumped 16 percent as the Italian carmaker took full control of Chrysler Group LLC in a $4.35 billion agreement. Next Plc (NXT) advanced 11 percent after the U.K.’s second-largest clothing retailer raised its profit forecast. Munich Re and Swiss Re Ltd. each fell more than 3 percent as reinsurance prices dropped.
The Stoxx 600 slipped less than 0.1 percent to 327.64 in the four-day week. The gauge rose for a second year in 2013, climbing 17 percent and closing at the highest level since May 2008 on Dec. 31. The European Central Bank pledged to keep interest rates low for a prolonged period and investors’ confidence in the U.S. economic recovery increased after the Federal Reserve decided to slow the pace of its bond buying.
“Growth is improving,” Philip Dicken, head of European equities at Threadneedle Investments, which oversees $70 billion in stocks, said in a phone interview. “The ECB has made a clear statement that it will be there to help, and tail risks have been reduced. If these things stay in place, then 2014 should be a good year for European equities. If we had a pullback, this would be an opportunity for us to buy.”
Global equities soared by $9.6 trillion in 2013 as central-bank stimulus helped the U.S. economy gain momentum and the euro area emerged from recession. The Stoxx 600 posted its biggest annual gain since 2009, ending the year at a valuation of 15.4 times its constituents’ projected earnings, up from 11.6 times at the beginning of 2013.
“We had a massive rerating of stocks so we do need earnings to come through, and our base case is that earnings will come through,” Threadneedle’s Dicken said. Profits in the Stoxx 600 will climb 15 percent in 2014, according to estimates compiled by Bloomberg. They fell more than 1 percent on average in the past three years.
Final readings confirmed on Jan. 2 that manufacturing in the euro area expanded in December at the fastest pace since May 2011, while output in Germany, the currency bloc’s largest economy, grew for a sixth consecutive month. In Spain, registered unemployment fell by 107,570 people last month, the most since June, the country’s labor ministry said Jan. 3.
National benchmarks rose in 10 of the 18 western-European markets this week. The U.K.’s FTSE 100 (UKX) slipped 0.3 percent. Germany’s DAX dropped 1.6 percent. France’s CAC 40 (CAC) retreated 0.7 percent. The Euro Stoxx 50 Index of the biggest shares in the euro area declined 1.2 percent, after two straight weekly gains.
“Everyone’s got a different motivation and various degrees of caveats, but overall a vast majority expects the rally in equities to continue, certainly for the first quarter,” Oliver Wallin, who helps oversee $5.6 billion as investment director at Octopus Investments Ltd. in London, said in a Jan. 2 phone interview. “We want to participate in the sweet spot” for equities, he said.
Fiat (F) jumped 16 percent this week and posted the biggest increase in almost five years on Jan. 2, after Sergio Marchionne, chief executive officer of Chrysler and its Italian parent, reached an agreement to buy a 41.5 percent stake from a United Auto Workers retiree health-care trust.
Next rose 11 percent. The retailer raised its full-year profit forecast on Jan. 3 after holiday sales exceeded company expectations. Next predicted pretax profit of 684 million pounds ($1.1 billion) to 700 million pounds for the year ending this month. That compares with October’s forecast of 650 million pounds to 680 million pounds. Shareholders will receive a special dividend of 50 pence a share on Feb. 3.
International Personal Finance Plc (IPF) climbed 17 percent, leading gains in the Stoxx 600. Citigroup Inc. raised its rating on the lender of small, unsecured cash loans to buy from neutral. Analyst Simon Nellis said investors overreacted to a Polish regulatory fine and that IPF predicts little impact from the decision even if it loses an appeal. IPF slumped 25 percent in the previous week.
Munich Re, the world’s biggest reinsurer, lost 4.3 percent and Swiss Re fell 3 percent. Global prices for reinsurance policies up for renewal on Jan. 1 declined amid an oversupply of capital in the industry, according to a unit of Marsh & McLennan Cos., the world’s largest insurance broker.
Rates for property-catastrophe reinsurance dropped 11 percent, driven by decreases in the U.S., according to a Dec. 30 statement from New York-based Marsh & McLennan’s Guy Carpenter division. Prices also slid for most other types of coverage.
Bayer AG dropped 2.2 percent after a U.S. regulator failed to approve its French partner Sanofi SA’s multiple-sclerosis drug Lemtrada. Bayer has the right to co-promote the treatment in the U.S. Sanofi slipped 0.4 percent this week.
Ophir Energy Plc (OPHR) slumped 6.3 percent. The London-based explorer said it failed to find oil or gas at its Mlinzi Mbali-1 well off the coast of Tanzania.
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